If life takes an unexpected turn, your lender may be able to help with a mortgage repayment holiday.
A mortgage payment holiday is a temporary period of time where your bank or lender won't require you to make your regular monthly repayments. This can be extremely helpful for many people in a variety of situations, as it can free up your cash flow and reduce the amount of money you need to pay out that month.
There are specific rules that apply to mortgage holidays, along with differing time frames as to how long your payment holiday will extend. It's also important to remember that not every lender will offer you the opportunity to take a mortgage holiday, so it pays to check whether your own home loan allows this before you attempt to apply for it.
Who needs a mortgage holiday?
There are multiple reasons why someone might need to apply for a mortgage holiday. You might consider this option if you've been retrenched and suddenly find yourself with no income, or if you or your spouse is on maternity leave and you're short of one income.
Why take a payment holiday?
Before you fall behind on any of your payments, you should always call your lender immediately and discuss your situation with them. Even if you suspect that you may be facing hardship, discuss your options with your lender anyway. This is a far easier course of action than allowing the bank to foreclose on the family home.
Some lenders may not immediately agree to a full repayment holiday and may suggest that you make reduced payments of whatever amount you're able to afford until you get back on your feet again. Others may suggest that you drop your payments to interest-only payments to ease the financial pressure on you, while still others may consider extending your loan term to help reduce your monthly repayments.
If your financial hardship is severe, your lender may consider offering a full mortgage holiday. This means you make no home loan payments at all during the holiday period, but you still get to keep your family home while you're working on improving your financial situation. Keep in mind, though, that interest will still be accruing on your home loan during the repayment holiday.
How long can my repayment holiday be?
The length of a repayment holiday is largely up to your lender. Most lenders will take into account your individual circumstances, and set up a repayment holiday that meets your needs. Be aware, however, that while your repayments are reduced or paused, interest is still accruing on the principal of your home loan. This means you'll eventually need to either increase your repayments or the length of your loan term in order to make up the difference.
Case Study: Mike and Andrea
After ten years of marriage, Mike and Andrea decided to separate. They still had a mortgage of $350,000 owing on the family home, but neither of them could agree how to make equal payments on the debt while they were fighting in court over the settlement figures. They contacted their lender, who agreed to a mortgage holiday of six months based on seeing the legal documentation showing that a settlement was being worked out.
Their lender capitalised the interest charges due on the mortgage and added them to the home loan balance during the court proceedings until the settlement was completed. Mike paid Andrea a settlement figure and he resumed making the regular monthly payments on the mortgage on his own.
How do I pause my home loan repayments?
There are several options available for pausing your home loan repayments. Some of these can be quite simple, while others may be a little more challenging.
1. Temporary mortgage payment suspension using your redraw facility
If you have been making extra payments off your mortgage balance, you may find that you have funds available. This is known as a redraw facility. Rather than withdraw these, you may be able to use them to substitute making repayments.
Most lenders will allow you to apply for a mortgage holiday where the payments are coming out of the extra money you've already paid.
2. Temporary mortgage payment suspension through hardship variation
If you don't have any extra money paid off your mortgage and you are unable to keep up with your regular repayments, you can apply to your lender for a hardship variation. The lender will add all interest charges on your home loan to the end of the loan term. You will have to verify that you truly are facing financial hardship and provide information relating to that hardship in order for the banks to agree to a mortgage holiday.
3. Temporary mortgage payment reduction
If your income has been reduced temporarily, such as one spouse losing a job and leaving you with only one income, you may be able to apply for a temporary reduction in your mortgage payments. In this situation, your lender may ask you to provide an amount of money you think you can comfortably repay without putting you into financial hardship. If they approve this, you will be expected to make those reduced payments on time until you get back on your feet financially again.
4. Switch payments to interest-only and/or switch home loan products
If you inform your lender that you're struggling to keep up with your mortgage repayments, you may be able to switch how your home loan repayments are calculated. Your regular payments are likely to be Principal and Interest repayments. This means that a portion of every payment you make covers just the interest component due, while the remaining amount pays down your mortgage balance a little more. Yet, you can switch your payments so that you pay only the interest amount and don't pay anything off the debt amount. This has the effect of reducing your payments, but keep in mind that you won't be reducing the principal owed on your home loan.
On top of this, you may be paying a full standard variable interest rate with your current mortgage. Yet, your lender may offer other home loan types that have substantially cheaper interest rates.
Rather than suggest a full mortgage payment holiday, your lender may suggest that you switch your home loan type to a lower interest rate, which automatically reduces your repayments. They may also suggest that you switch to interest-only payments at the same time. The combined effect of this may help to ease your cash flow far enough so that it's not so much of a struggle financially to meet your repayment obligations.
How a mortgage holiday works
Mortgage holidays can work in two ways. If you have been paying more than required each repayment cycle, you may be able to take advantage of these funds. If you haven't got access to a redraw facility, then you can capitalise your interest back into the loan. This takes what you would have paid in interest and adds it to the total value of the loan
Re-using your additional repayments
Case Study: Jason
Jason was informed by his employer that his position had been made redundant and he wouldn't be required in his role any longer. While he received a redundancy payout from his employer, he hadn't yet found a new job to replace his old one and so he had no regular income. He decided to deposit some of the redundancy payout into his home loan account.
Jason contacted his lender and discussed his options with them. Based on the amount of money available in his redraw facility from his payout amount, the lender agreed to give him a mortgage holiday of six months. His payout funds were then used to cover the cost of his mortgage holiday. Once Jason found another job and his income was regular again, he contacted his lender to resume his normal monthly payments.
Capitalising missed payments onto the balance of the loan
If you have made any extra payments off your mortgage, your lender may suggest that your mortgage holiday is funded by using those funds to cover your repayments.
However, if you don't have excess funds in your home loan your lender may choose to add the interest charges that have been incurred onto the top of your home loan balance. This can extend your loan term and add thousands of dollars to your original loan amount, but could keep you from losing your home during a period of temporary financial hardship.
Case Study: Sylvia
Sylvia is a single mum with a young daughter. She became very ill and required several months off work for treatment. Unfortunately, without being able to work at her job she also had no income to cover her mortgage payments. She called her lender and explained the situation to them.
Even though she had no excess funds available in savings or in her redraw facility, they agreed to pause her repayments for the four months that her treatment required. In this case, they agreed to capitalise the interest charges onto the end of her original loan term. Once she had fully recovered and returned to work, she resumed her normal monthly repayments again.
How much does a payment holiday really cost?
Stopping the payments on your home loan even for a short time can cost you a lot more than you might think.
Here's an example of how much it might cost.
Let's assume your mortgage balance is $300,000 with an interest rate of 6.2%. Your minimum monthly repayments will be $1,838 per month, which you pay comfortably for the first 12 months. After this time, you've managed to get your home loan balance down to $296,451.40, but you find that you've lost your job and you need to take a three month mortgage holiday.
During your repayment holiday, any payments that come off your home loan balance go on hold, but the interest certainly doesn't. Instead, your lender adds the interest charges onto your loan balance. The interest that was added to your home loan balance during that first month will also have interest charged on it during the second month. Both of those amounts will have interest charged on them during the third month of your holiday.
After just three months, your mortgage balance is now higher than the original amount you borrowed 12 months ago. But it doesn't end there.
You see, you've already been in your mortgage for 12 months. This means your loan term has 29 years left to run, but you also have a higher mortgage balance. As a result, your repayments will increase to cover the difference in balance so that you still pay off your mortgage on time.
Your original payments were $1,838 per month. Based on the new balance and the shorter loan term, your new payments will be $1,865 per month. This is only $27 per month, so it doesn't sound like much, but if you add up those payments over the total course of the loan, you end up with a very different figure.
On the new payments, the total amount you'll pay back to the bank is $649,183.21. Yet, if you'd found a way to stick to your original payments without taking the payment holiday, you would only have paid $639,416.
That's almost a $10,000 difference over the total loan term.
Of course, if you face the prospect of losing your home during a period of temporary financial hardship that you know you can recover from, those costs might just be worth it in the long run.
The big four banks have programs in place to help home loan customers facing financial hardship.
ANZ allows customers to take a repayment holiday of up to three months. During the repayment holiday, interest will still accrue on the outstanding principal. Once the repayment holiday is over, you can either increase your repayments or extend your loan term to cover the extra interest that has accrued.
Commonwealth Bank offers repayment relief on a case-by-case basis. A Commonwealth Bank representative can work with you to find options, including extending your home loan term to reduce your repayments.
NAB offers individualised hardship agreements. The bank has a customer team who specialises in putting together payment plans or variations. Any variations will require you to make up payments in the future, but NAB’s specialists will help you put together a plan to catch up on your commitments.
If you’ve made additional repayments on your Westpac home loan, you can reduce your payments by up to 50% for up to six months. This option is available twice during the life of your loan.
If you’re experiencing financial hardship, you can contact Westpac to set up a hardship plan. The bank also offers free independent advice from a financial counsellor, and access to the Salvation Army’s Doorways program, which specialises in helping individuals and families in financial hardship.
Frequently asked questions
When is it appropriate to take a payment holiday?
While payment holidays can be quite expensive, there are times when they can make sense. For example: if you face the very real prospect of falling behind on your payments it's important to discuss your options with your lender immediately. Your lender may not agree to a repayment holiday at first, but instead may suggest alternatives that can still help you get back on your feet financially without affecting your home loan. This might include reducing your interest rate to lower your payments, switching your payments to Interest-Only payments, or even taking the next few payments out of any extra payments you might have made onto your mortgage. When these avenues have been exhausted, your lender may then agree to a full mortgage holiday.
How do I apply for a hardship variation?
The moment you realise that you're unable to meet your repayment obligations you should call your lender and discuss your options. You may be required to submit evidence of the reason for your hardship, along with proof of your current income situation in order to receive a full mortgage holiday.